Saturday, May 17, 2008

Default taxes

Here is a common paradox. Numerous willingness to pay studies in cities show that most urban residents are more than willing to pay higher than prevailing user charges for efficient delivery of civic services. But the moment the Urban Local Body (ULB) raises the user charges or tariffs, protests break out, invariably forcing the ULB to either backtrack or considerably dilute the increase. How do we bridge this paradox?

ULBs (or for that fact, any Government agency) find it difficult to impose fresh or even raise taxes or user charges on various civic services. One of the biggest challenges is that of collecting user charges on garbage collection, transportation and disposal, from our city residents. In this context, how about a flexible system that imposes a specified amount of default user charges for solid waste collection, but leaves the option for payment on the individual citizen?

It can be argued that this is an effective way of stimulating the civic sensibilities of any citizen. I will argue that there is a strong case for experimenting this approach despite its "slippery slope" nature, provided there is enough evidence of willingness to pay among certain categories of consumers. Fortunately, as mentioned earlier, numerous studies have shown significant willingness to pay among garbage generators and regular citizens, provided the quality of service is good.

It can be made even more effective if a flat default payment is fixed and an option given to the consumer to voluntarily pay the default amount or any other amount he is willing to. This is a more economically efficient arrangement to elicit the full value from the willingness of citizens to pay for the service delivered. This arrangement can be initially tried out in some of the more well off colonies and then extended to other areas.

In an age where taxes and user charges are fast becoming an anathema, default payments can become a useful strategy to efficiently draw out the consumer willingness to pay.

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